Over 20 years after the US-led invasion upended the country, Iraq was starting to build momentum.
The country had entered a period of relative calm, with ISIS out of the picture ever since its caliphate crumbled in 2019. The country was warming to democracy: turnout hit 56% in the 2025 parliamentary elections, 13 points higher than in the previous parliamentary votes four years prior, and a third of the candidates were women. Its economy, too, was showing signs of life, as improved security has prompted more foreign investment – Baghdad was even experiencing a construction boom.
“This, after 2019, was the first phase in the country where you had some sense of stability,” Dr. Hans-Jakob Schindler, senior director of the Counter Extremism Project, told GZERO.
The US-Israeli war with Iran and the subsequent closure of the Strait of Hormuz have seen that momentum come crashing to a halt. Oil exports have plunged from 3.4 million barrels per day before the war to roughly 250,000. With the Strait shut, a pipeline to Turkey is the only way for crude to exit the country, hundreds of miles away from Iraq’s southern region, where most oil is extracted.
The economic impact has been devastating. Iraq relies on crude sales for 90% of its state income. What’s more, over 10 million citizens are employed by the state, and economists estimate that salaries could be affected within the next two months if the situation doesn’t change. Many Iraqis are worried they will soon not be able to afford food.
“The conflict has disrupted Iraq’s economic rebound,” Bilal Bassiouni, head of Risk Forecasting at the political risk advisory Pangea-Risk, told GZERO. He added that the loss of oil export revenues has prompted the government to tighten its budget, halt payment to contractors, and create “uncertainty to upstream investment plans.”
Underscoring this downturn, the IMF downgraded Iraq’s growth forecast on Tuesday. It now expects the economy to contract 6.8% in 2026.
Iraq has become something of a forgotten victim of the Iran war, referenced more because of the 2003 US-led invasion that serves as a cautionary tale for American involvement in the Middle East than as an example of a country experiencing the economic fallout from the war. It is not part of the Gulf Cooperation Council, which holds some sway over Washington, yet it suffers many of the same economic consequences due to its reliance on oil exports via the Strait of Hormuz.
What’s more, unlike its Gulf neighbors, Iraq lacks a sovereign wealth fund to draw from when oil export revenues drop. At the same time, it’s more reliant than Gulf states on Iran for cross-border trade – with the Islamic Republic shutting down the internet and the Iranian economy in crisis, that hurts Iraq further.
It’s not just economics. The Middle East conflict has put Iraq in an awkward position between two countries upon which it relies: the US and Iran. The United States helped to build the Iraqi government as it stands today, and has invested billions into training, supporting, and supplying the Iraqi military. It also holds sway over its oil industry – a lasting outcome of the US occupation. Tehran, meanwhile, has cultivated a relationship on a “diplomatic and ethnic basis,” per Schindler, as both countries are majority Shia. As a result, Iraq has desperately tried to remain neutral.
Yet, Schindler notes, the effects of the Iran war could have been even worse. Unlike in Lebanon, where the Iran-backed militant group Hezbollah attacked Israel and prompted a counter-invasion, Iranian proxies in Iraq – collectively known as the al-Hashd al-Shaabi or “Popular Mobilization Front” (PMF) – have largely refrained from strikes against the US or Israel.
“There were a couple of attacks [by the PMF]. But it wasn’t like all hell broke loose in Iraq all of a sudden,” said Schindler, adding that Iran’s control over the militias in Iraq isn’t as expansive as it is over Hezbollah in Lebanon.
The Iran conflict is also unfolding amid a political crisis in Iraq. In January, the Shi’ite majority in parliament nominated former Prime Minister Nouri al-Maliki to return to the role following last year’s election, but the US swiftly kiboshed this move – al-Maliki retains strong links to Iran and fueled sectarian tensions that helped give rise to the Islamic State when he was last in office. For now, Mohammed Shia al-Sudani continues to serve as PM, without a fully-formed parliament – a less-than-ideal situation given the war next door.
If Iraq wants to create a functioning political system, it will need to rid itself of Iranian influence, according to James Jeffrey, who served as US ambassador to Iraq from 2010 to 2012.
“As long as Iran has its stranglehold through the Shia on Iraq, the Iraqi people are suffering a more moderate version of what the Lebanese people have gone through in the last 15 years,” Jeffrey told GZERO, “which is, bit by bit, disintegration of any kind of rational economic planning, corruption, violence within the system.”
So what’s next for Iraq? Beyond sorting out its political situation, there are major questions over whether the country should try to reduce its reliance on oil markets. Initial indications suggest otherwise, per Pangea’s Bassiouni, as Iraq is instead trying to boost its pipeline network.
“The war has probably strengthened the government’s focus on protecting oil revenue supply chains rather than replacing them,” said Bassiouni.
Ultimately, Iraq’s economic and political trajectories hinge primarily on Iran’s choices once the war ends – and how Iraq copes with them, per Jeffrey. The former American diplomat warned that when the war ends, Iran may try to wreak havoc in Iraq and drag it into its anti-Western, anti-Israeli, anti-American alliance – much as it did in Lebanon with the help of Hezbollah – potentially derailing Iraq’s chance for recovery.
“The most important thing that will happen to Iraq will not happen to Iraq within Iraq,” said Jeffrey. “They will be based upon how Iran reacts in the future to the new situation in the Middle East.”
